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Tutorial: Main Facets of a CompanyThe company is the business format of choice for a vast number of businesses in
this country.
Separate legal personality
It is an artificial legal person. It has its own legal personality, sperate from its owners.
A company itself in its own right has legal capacity to do almost anything a human
being is allowed to do. This includes key aspects of running a business as owning
property, being a party to contracts, being a claimant or defendant in legal
proceedings and paying tax on profits.
A company needs human beings to manage its affairs. The human beings in charge
of a company business are known as directors.
As a result of its separate legal personality, it is the company itself which incurs legal
obligations. This makes the company an attractive business format for people who
wish to avoid personal liability for what happens in the course of the business. If you
run a business as a partner or sole trader, there is no separation between you and
your business. This will lead to you liable for what happens in the course of the
business.
What are shareholders?
You could think of a share in the company as like a slice of ownership. Each
shareholder individually owns a certain number of shares. Between them, the
shareholders own the entire company. A person can acquire shares in a company in
two ways; either the company itself issues new shares to the person or the person
acquires shares from an existing shareholder.
A company itself has its own legal personality and can therefore be a shareholder in
another company and the two companies will be separate legal persons.
If company A owns the majority of the shares in company B, then A is known as a
holding company or parent company and B is known as a subsidiary of A.
Section 112 of the Companies Act 2006
(1) The subscribers of a company’s memorandum are deemed to have agreed to
become members of the company, and on its registration become members
and must be entered as such in its register of members.
(2) (2) Every other person who agrees to become a member of a company, and
whose name is entered in its register of members, is a member of the
company.
Subsection 1 provides that the subscribers of the company’s memorandum
automatically become members at the moment when the company is incorporated
e.g., the moment when the company comes into existence.
This subsection one refers to this moment as the registration of companies in the
incorporation process.
, Tutorial: Main Facets of a Company
The subscribers of the memo means that the persons who signed the company’s
memo of association. This is one of the key documents needed to incorporate a
company.
Subsection 2 provides that the other members of the company will be every person
who has agreed to become a member of the company, and whose name has been
entered in the company’s register of members.
The register of members is a list of the members of the company and the number of
shares they own. It does not expressly say so, if a person will not be entered in the
register of members unless they own at least some shares.
Do the shareholders ever incur liability due to the company’s actions?
Do the shareholders ever incur liability directly to third parties due to the company’s
actions.
The answer is that as a general rule, they do not. This is because of the company’s
separate legal personality. It is only the company itself which incurs the liability to the
third party, not the shareholders.
The third party may have required the shareholder to enter into an independent
agreement with the third party, guaranteeing the company will perform its
obligations.
The shareholder would be directly liable to the third party under that independent
agreement. A typical example is that a company’s bank may require the
shareholders to guarantee that the company will pay off its overdraft.
Do the shareholders incur liability if the company does into insolvent liquidation?
The answer depends on whether the company is a limited company, which is defined
in section 3 of the Companies Act 2006. Section 3 provides that a company is a
limited company if the liability of its members is limited by its constitution.
Vast companies are limited companies that are registered in England and Wales. If a
limited company goes into insolvent liquidation, the shareholders may incur a limited
degree of liability.
The liability is to contribute money to the company itself, not directly to the
company’s creditors. The company’s liquidator will use these contributions and
money raised by other means such as selling the company’s property to create some
cash. The liquidator will then use this pool of cash to pay the company’s creditors as
much as possible of what the company owes them.
There is a limit on the amount of money as a shareholder is liable to contribute toa
limited company in insolvent liquidation. The extent of this liability is shown in section
74(2)(d) of the Insolvency Act 1986.
Section 74 of the Insolvency Act 1986
74 Liability as contributories of present and past members
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